Why Amazon Coins Are a Bad Idea

Back in February we found out Amazon.com was launching Amazon Coins, a new way to make purchases from Kindle Fire devices. Yesterday, the new coins system launched, and if the short history of the Internet has anything to say about it, Amazon Coins are already doomed.

Coins don't make centsFirst, let's talk about what these coins are and why Amazon is pushing them. Amazon Coins can be used to buy apps, games, virtual gifts for friends and even song collections inside certain apps. Amazon is likely trying to lure more developers to its platform by using the coins to boost in-app purchases. Amazon has said developers still receive 70% when customers make purchases with coins.

Amazon has already given every current and new Kindle Fire owner 500 coins, which is equal to $5. And users who buy coins in bulk will receive 10% off the purchase of those coins. By offering Kindle Fire users a way to buy and earn the coins, it's trying to keep them entwined into the company's Kindle ecosystem. There's no problem with wanting users to stay connected the Kindle device and making purchases -- all companies with a virtual ecosystem should be doing the same. The problem lies in getting users to accept the currency system and believe that it's better than using money.

Keep that in mind, it has to be easier than using money and users need to believe they're getting a better deal than paying with real money.

Been there done thatThat's where two tech companies have gone before Amazon -- and mostly failed. Microsoft launched an online currency system called Microsoft Points several years ago. The points were used to buy Xbox games, extra features inside of games, movies and TV shows. Sounds like a good idea, right? But with the launch of Windows 8, Microsoft started phasing out the use of points for the purchase and rental of music and video content.

Microsoft still uses the points for Xbox users, but while beta versions of Windows 8 used the points for video and purchases and rentals, the latest version of the software defaults to regular credit card purchases. Some have noted the conversion rate for the points -- $1 for 80 points -- confused Microsoft users. Therein is one of the major problems of virtual currency, users have a hard time knowing how much they're paying for something, which isn't a great way to make people feel like they can trust the payment system.

Facebook also tried its hand at virtual currency starting back in 2009 with its Facebook Credits for game purchases and virtual goods. The company even sold physical cards in some stores to redeem the credits. Rumors swirled that Facebook Credits would become the new way for making purchases online. But at the end of last year, the social media giant phased out credits and went back to using local currencies for online purchases. Some have said Facebook didn't market the credits enough, or that developers didn't receive enough compensation when Facebook users made purchases with Credits.

But the reason why Microsoft Points and Facebook Credits didn't work may be much simpler than that.

Just because users are buying content online and in a virtual environment doesn't mean they want a new currency for making those purchases. We all understand how money works. There's no conversion we need to make in our minds when we buy something for $5. The problem comes when you have 13,729 Amazon Coins and an app costs 599 of those coins and a you can't figure out much that's actually costing you or how much dollar amount you'll have left when you make the purchase.

Think of your credit card points and how skewed the numbers feel when you try to redeem those points for a gift card, cash, or flashlight clock radio. They never seem to add up, and it always feels like a scam. I think Kindle Users will eventually feel the same way as Amazon Coin conversions become more complicated than using real money. A simple 1 to 1 conversion between dollars and virtual currency is the most honest and the least confusing. Anything less just doesn't add up.

Despite the cloudy future ofÂ Amazon Coins, there's no disputing Amazon is king of the online retail world. The Motley Fool's premium report will tell you what's driving the company's growth, and fill you in on reasons to buy and reasons to sell Amazon. The report also has you covered with a full year of free analyst updates to keep you informed as the company's story changes, so click here now to read more.

Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Facebook. The Motley Fool owns shares of Amazon.com, Facebook, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.